Saving for retirement in the UK

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Topic Author
YABH74
Posts: 6
Joined: Fri Sep 10, 2021 12:45 pm

Saving for retirement in the UK

Post by YABH74 »

Hi,
I live in the UK. I’m in my late 40s and saving for retirement. I contribute through salary sacrifice into a SIPP.


Equities: 60%

Vanguard FTSE Developed Europe ex-U.K. Equity Index Fund - 15%

Vanguard FTSE Developed World ex-U.K. Equity Index Fund - 20%

Vanguard FTSE Global All Cap Index Fund - 18%

Vanguard FTSE U.K. All Share Index Unit Trust - 2%

Vanguard Japan Stock Index Fund - 3%

Vanguard Pacific ex-Japan Stock Index Fund - 2%


Bonds: 40%

Vanguard Euro Government Bond Index Fund - 5%

Vanguard Global Bond Index Fund - 7.5%

Vanguard U.K. Government Bond Index Fund - 2.5%

Vanguard Japan Government Bond Index Fund - 5%

Vanguard U.S. Government Bond Index Fund - 20%



Questions I ask myself:

1) Should I invest more in the FTSE UK All Share and less globally?

2) Is there any benefit to holding EU and Japanese government bonds? Should I merge them into one of the other bond funds?

3) How much if any corporate bonds should I own? Should I mainly focus on government bonds, especially US government bonds?

4) Is it valid to create an overall risk rating using the rating for each fund and weighting it with the amount of money invested to create an overall risk rating?

5) Should I merge Vanguard FTSE Global All Cap Index Fund & Vanguard FTSE Developed World ex-U.K. Equity Index Fund, but which one?

6) Do nothing?


Thanks.
TedSwippet
Posts: 3859
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Saving for retirement in the UK

Post by TedSwippet »

Welcome.
YABH74 wrote: Fri Sep 10, 2021 3:08 pm Questions I ask myself:

1) Should I invest more in the FTSE UK All Share and less globally?

2) Is there any benefit to holding EU and Japanese government bonds? Should I merge them into one of the other bond funds?

3) How much if any corporate bonds should I own? Should I mainly focus on government bonds, especially US government bonds?

4) Is it valid to create an overall risk rating using the rating for each fund and weighting it with the amount of money invested to create an overall risk rating?

5) Should I merge Vanguard FTSE Global All Cap Index Fund & Vanguard FTSE Developed World ex-U.K. Equity Index Fund, but which one?

6) Do nothing?
I guess my first counter-question would be, what process did you use to design your current portfolio?

It's not bad; these are all low-cost trackers, and if you look at it as a whole it could be close to world market-cap on the stocks side. But it looks over-complicated. There's a lot of overlap. Developed Europe is a component of Developed World, and Developed World will be a component of Global All Cap. The same thing for Japan and Pacific. And the UK is a component of Global All Cap also. A matryoshka doll portfolio.

As for your questions ... bonds aren't my thing, but on stocks 1) probably not, market cap weight should be fine, and 5) not just these, but unless there is a compelling reason for keeping separate components (a good cost saving on a large portfolio, say), then for my money, I'd consider merging everything into just the Global All Cap and simplify everything down.
Topic Author
YABH74
Posts: 6
Joined: Fri Sep 10, 2021 12:45 pm

Re: Saving for retirement in the UK

Post by YABH74 »

Thanks TedSwippet.

I take you point about the equity being over complicated. Maybe the FTSE Global All Cap should be the only equity fund in the portfolio. I am leaning towards this idea.

I started off with the FTSE Global All Cap as the base for the equity part of the portfolio and added the other funds. The main reasons for the other funds are: concentration of investments in the USA, costs and Emerging Markets. Are these valid?


Concentration of investment in USA

Both the FTSE Global All Cap and FTSE Developed World ex-UK are very USA focused funds. Investing in non-USA funds reduces the emphasis on the USA.

- FTSE Global All Cap - 58.5% invested in USA
- FTSE Developed World ex-UK - 71% invested in USA

I suspect the FTSE Global All Cap invests in small cap and FTSE Developed World ex-UK doesn’t.


Costs

There is some cost savings between the FTSE Global All Cap and FTSE Developed World ex-UK.

- FTSE Global All Cap - 0.23% or £230 / year in fees for every £100,000
- FTSE Developed World ex-UK - 0.14% or £140 / year in fees for every £100,000

Cost difference over 20 years £1,800 for every £100,000

The other equity funds are also cheaper than the FTSE Global All Cap.



Emerging Markets

FTSE Global All Cap invests about 13% of the fund in Emerging Markets. I’m wary of investing in Emerging Markets which is why I invested in the FTSE Developed World ex-UK to reduce the overall investment in emerging markets. I suspect I’m also reducing the overall investment in small cap too as a side effect.

Some countries in the Emerging Markets fund such as Korea are also in the FTSE Developed World ex-UK. Therefore the true Emerging Market investment in the FTSE Global All Cap may be less than 13%.



As I head closer to retirement (probably 20 years away, maybe sooner) should I look to investing more in developed markets and large/medium cap and away from Emerging Markets and small cap?
jg12345
Posts: 145
Joined: Fri Dec 11, 2020 1:03 pm

Re: Saving for retirement in the UK

Post by jg12345 »

Hi YABH,

I second your idea of leaning towards 1 global all cap fund, great thinking. on your points:

- USA concentration: US companies sell all over the world, so the fact that they are based in US does not mean necessarily you're overly USA focused. also, it's hard to see why that is a problem given how the full stock market, which has always included the US, has performed in the past 100 years or so.
- Costs: I am not sure what are your commission costs, but I have a feeling that, because you'll need to rebalance, bid-ask spread costs and commission costs will make the savings you mention negligible. And I am not even counting the risk that you will do mishaps while rebalancing (pretty high! worst enemy to your strategy is yourself)
- EM: if you have a psychological/behavioral problem with EM, and that would keep you out of the market, then better buy "Developed world" only (1 fund). However, price of EM is done by the market... so if you believe that you don't know better than the market, there should be no reason to keep EM out.

As you head towards retirement... your stock part can (and probably, should) stay in a global all stock fund.

For the Bond part, probably a single global bond hedged to GBP would work for you.

Finally, have you ever thought of lifestrategy funds? they do all the rebalancing for you. slightly UK-biased, but it's not a huge deal I don't think, especially as it seems you're ok with that.
Topic Author
YABH74
Posts: 6
Joined: Fri Sep 10, 2021 12:45 pm

Re: Saving for retirement in the UK

Post by YABH74 »

Thanks for your comments jg12345. You make some good points about USA concentration and Emerging Markets. I don’t believe I will incur any direct transactions costs. Maybe indirectly in the fund price when buying and selling. I hold the index funds in a Vanguard SIPP.

I have thought about Life Strategy and Target Retirement funds.

The Life Strategy 60/40 fund is very overweight in UK equity which I wasn’t keen on.

The Target Retirement fund 2045 has about 20% bonds which I don’t feel comfortable with.

Why do the Life Strategy and Target Retirement funds invest in so many funds rather than one equity and one bond fund? I suppose one strategy is to copy the Life Strategy 60/40 and reduce the UK overweight.

The ugly correlation matrix shows the most negatively correlated bonds as being US Government bonds. This is why a large proportion of the bonds are in US Government bonds.

The Global Bond fund has about 20% in BBB rated bonds. It also includes corporate bonds. Would I be better investing in less bonds which are more negatively correlated, high credit quality and no corporate bonds?

For UK bonds, the risk rating is higher than Global Bonds, US Government Bonds, EU and Japanese government bonds. The point of the bonds is to help reduce overall volatility and hopefully they’ll go up when equity drops allowing me to rebalance, buying cheaper equity.
minimalistmarc
Posts: 1332
Joined: Fri Jul 24, 2015 4:38 pm

Re: Saving for retirement in the UK

Post by minimalistmarc »

I’d simplify to one or two funds. VWRP (global equities) for equities and VAGP (global bonds), in your desired allocation.

I prefer ETFs to funds because Hargreaves has capped fees for these (£200 per year max) but uncapped for funds (0.45% uncapped) which can be eye wateringly expensive
xxd091
Posts: 285
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: Saving for retirement in the UK

Post by xxd091 »

Good advice for you here
Your portfolio is fine but does it need to be so complicated?
A global equities and global bond index tracker would achieve the same results
A simple portfolio is cheaper,easier to follow and understand-not so much fun though!
xxd091
Topic Author
YABH74
Posts: 6
Joined: Fri Sep 10, 2021 12:45 pm

Re: Saving for retirement in the UK

Post by YABH74 »

Thanks minimalistmarc and xxd091 for your comments and advice.

I found How To Build A Two Fund Portfolio interesting and helpful in case anyone else stumbles across this thread.
xxd091
Posts: 285
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: Saving for retirement in the UK

Post by xxd091 »

Some reassurance for you
Aged 75-retd 18 years
2 funds only -works in U.K. as well as in the States
A global equities and bond index tracker(2 funds) only worked for me and still does
xxd091
Topic Author
YABH74
Posts: 6
Joined: Fri Sep 10, 2021 12:45 pm

Re: Saving for retirement in the UK

Post by YABH74 »

Thanks xxd091. Good to hear a real life story. :happy
jg12345
Posts: 145
Joined: Fri Dec 11, 2020 1:03 pm

Re: Saving for retirement in the UK

Post by jg12345 »

YABH74 wrote: Sun Sep 12, 2021 3:16 am Thanks for your comments jg12345. You make some good points about USA concentration and Emerging Markets. I don’t believe I will incur any direct transactions costs. Maybe indirectly in the fund price when buying and selling. I hold the index funds in a Vanguard SIPP.

I have thought about Life Strategy and Target Retirement funds.

The Life Strategy 60/40 fund is very overweight in UK equity which I wasn’t keen on.

The Target Retirement fund 2045 has about 20% bonds which I don’t feel comfortable with.

Why do the Life Strategy and Target Retirement funds invest in so many funds rather than one equity and one bond fund? I suppose one strategy is to copy the Life Strategy 60/40 and reduce the UK overweight.

The ugly correlation matrix shows the most negatively correlated bonds as being US Government bonds. This is why a large proportion of the bonds are in US Government bonds.

The Global Bond fund has about 20% in BBB rated bonds. It also includes corporate bonds. Would I be better investing in less bonds which are more negatively correlated, high credit quality and no corporate bonds?

For UK bonds, the risk rating is higher than Global Bonds, US Government Bonds, EU and Japanese government bonds. The point of the bonds is to help reduce overall volatility and hopefully they’ll go up when equity drops allowing me to rebalance, buying cheaper equity.
I also do not like the UK home bias of lifestrategy and target retirement funds, and like you I am not buying into them for the same reason.

My suggestion is in line with minimalistmarc and xxd: keep it simple. 1 fund for global stock and 1 fund for global bonds.
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